Many classes of bonds are being punished for the problems of subprime mortgage debt, but at least one segment of the market is expected to perform well this year -- long-term, investment-grade municipal bonds.
The US$2.6 trillion municipal bond market is generally considered safe as Treasuries because most local governments make debt payments their top fiscal priority. Even New Orleans met obligations on its bonds after Hurricane Katrina.
Munis, as they are known, are issued by cities, counties, states, water districts, schools and hospitals. They are popular because of their safety premium and because they create funding for favorite local projects. But their biggest selling point probably is many are not taxable.
"If you want to buy a defensible asset that hasn't rallied, munis are the place to be," said RJ Gallo, a portfolio manager at Federated Investment Management Co.
Investors are also buying munis because they are aware that assets backed by bad mortgage debt remain unattractive.
But muni prices have come under pressure of late, as they get tarred with the same brush as riskier credits. Many analysts think munis are unfairly being caught up in the problems of the insurers that back about 40 percent of this market.
Bond insurers like Ambac Financial Group Inc and MBIA Inc remain in limbo as they scramble for the financing that would allow them to operate as usual, while FGIC is considering a split that will separate the healthy municipal bonds it backs from subprime assets.
The market's problems have also contaminated an unlikely niche of the municipal market, auction-rate securities. This US$330 billion short-term muni bond market segment normally performs like clockwork. But this week queasy buyers went on strike, leading to hundreds of auction failures, because troubled insurers back many of these deals.
The auction failures were unprecedented and left short-term financing in disarray at schools, student loan companies and transportation authorities around the country. An auction failure does not throw the securities into default, but it does drive up borrowing rates severely, since the interest rate on such instruments changes every time they are sold -- and soars if they are not sold.
In the last few days, the Port Authority of New York and New Jersey saw its short-term interest rate on some notes increase fivefold to 20 percent after a failed auction, while a Michigan student loan program suspended operations to avoid the higher rate.
Yet throughout the insurers' drama, strong demand persisted for top-quality munis. This is because the selloffs sent prices lower and yields higher, making them a good buy.
Investors' comfort with munis sometimes is enhanced by the fact that they finance local institutions and projects they can track.
About 35 percent of municipal bonds are purchased by investors with direct knowledge of local issuers, Gallo said.
FALLING BEHIND: Samsung shares have declined more than 20 percent this year, as the world’s largest chipmaker struggles in key markets and plays catch-up to rival SK Hynix Samsung Electronics Co is laying off workers in Southeast Asia, Australia and New Zealand as part of a plan to reduce its global headcount by thousands of jobs, sources familiar with the situation said. The layoffs could affect about 10 percent of its workforces in those markets, although the numbers for each subsidiary might vary, said one of the sources, who asked not to be named because the matter is private. Job cuts are planned for other overseas subsidiaries and could reach 10 percent in certain markets, the source said. The South Korean company has about 147,000 in staff overseas, more than half
Taipei is today suspending its US$2.5 trillion stock market as Super Typhoon Krathon approaches Taiwan with strong winds and heavy rain. The nation is not conducting securities, currency or fixed-income trading, statements from its stock and currency exchanges said. Yesterday, schools and offices were closed in several cities and counties in southern and eastern Taiwan, including in the key industrial port city of Kaohsiung. Taiwan, which started canceling flights, ship sailings and some train services earlier this week, has wind and rain advisories in place for much of the island. It regularly experiences typhoons, and in July shut offices and schools as
An Indian factory producing iPhone components resumed work yesterday after a fire that halted production — the third blaze to disrupt Apple Inc’s local supply chain since the start of last year. Local industrial behemoth Tata Group’s plant in Tamil Nadu, which was shut down by the unexplained fire on Saturday, is a key linchpin of Apple’s nascent supply chain in the country. A spokesperson for subsidiary Tata Electronics Pvt yesterday said that the company would restart work in “many areas of the facility today.” “We’ve been working diligently since Saturday to support our team and to identify the cause of the fire,”
TECH PARTNERSHIP: The deal with Arizona-based Amkor would provide TSMC with advanced packing and test capacities, a requirement to serve US customers Taiwan Semiconductor Manufacturing Co (TSMC, 台積電) is collaborating with Amkor Technology Inc to provide local advanced packaging and test capacities in Arizona to address customer requirements for geographical flexibility in chip manufacturing. As part of the agreement, TSMC, the world’s biggest contract chipmaker, would contract turnkey advanced packaging and test services from Amkor at their planned facility in Peoria, Arizona, a joint statement released yesterday said. TSMC would leverage these services to support its customers, particularly those using TSMC’s advanced wafer fabrication facilities in Phoenix, Arizona, it said. The companies would jointly define the specific packaging technologies, such as TSMC’s Integrated
RSS